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Wholesales Explained

Posted by Jason Cummings | Jul 08, 2024 | 0 Comments

Understanding Wholesales in Real Estate

Investing in real estate can be a great way to build wealth, but it can also be complex, especially if you're new to the field. One strategy that has become popular among real estate investors is wholesaling. If you're not familiar with the term, don't worry! This blog post will break down what wholesale properties are and explain the different types of wholesaling methods: assignment contracts, double closings, and novations.

What is Wholesaling in Real Estate?

Wholesaling in real estate is a strategy where an investor, known as a wholesaler, finds a property for sale, gets it under contract, and then sells the contract to another buyer, usually an investor, at a higher price. The wholesaler doesn't typically purchase the property themselves; instead, they make a profit from the difference between the price agreed with the seller and the price paid by the buyer.

"3 Most Commonly Used Wholesaling Methods"
  1. Assignment Contracts
  2. Double Closings
  3. Novation
Assignment Contracts

Assignment contracts are the most common form of wholesaling. Here's how it works:

Finding the Property: The wholesaler identifies a property, often one that needs some work or is being sold below market value.

Getting it Under Contract: The wholesaler enters into a purchase agreement with the seller. This contract includes an assignment clause, which allows the wholesaler to transfer their rights to another buyer.

Finding a Buyer: The wholesaler finds an investor willing to buy the contract. The buyer pays a fee for the right to purchase the property at the agreed price.

Assigning the Contract: The wholesaler assigns the contract to the buyer. The buyer closes the deal directly with the original seller, and the wholesaler earns an assignment fee for facilitating the transaction. 

For example, if a wholesaler finds a property for $100,000 and agrees to sell the contract to an investor for $110,000, the wholesaler makes a $10,000 profit.

Double Closings

Double closings involve two separate transactions: one where the wholesaler buys the property from the seller and another where they sell it to the end buyer. Here's the step-by-step process:

First Closing: The wholesaler purchases the property from the seller. This requires the wholesaler to have the funds or financing to buy the property.

Second Closing: The wholesaler immediately sells the property to the end buyer, usually on the same day or within a very short period.

Double closings are sometimes used when the profit margin is larger or when the end buyer prefers not to know the original purchase price. However, they can be more complex and involve higher closing costs since there are two separate transactions.

 
Novations

Novations are a less common but still effective method of wholesaling. In this scenario, the wholesaler replaces the original purchase agreement with a new one involving the end buyer. Here's how it works:

Agreement with the Seller: The wholesaler agrees to find a buyer for the property. Instead of assigning the contract, they enter into a novation agreement with the seller, which allows them to replace the original contract with a new one.

Finding a Buyer: The wholesaler finds an end buyer who agrees to purchase the property.

Creating a New Contract: The wholesaler and the seller agree to cancel the original contract and replace it with a new contract between the seller and the end buyer.

Closing the Deal: The end buyer purchases the property directly from the seller, and the wholesaler receives a fee for their role in facilitating the transaction.

Novations can be useful when dealing with properties that require significant repairs or when the wholesaler wants to avoid the risks associated with double closings.

What Happens if a Wholesaler Can't Find an End Buyer?

Wholesaling real estate can be profitable, but it comes with risks. One of the primary risks is not being able to find an end buyer before the closing date. Here's what happens and what options a wholesaler has if they can't find an end buyer:

Contingencies and Contract Clauses

Most wholesalers include contingencies in their contracts to protect themselves if they can't find an end buyer. These contingencies might allow the wholesaler to back out of the deal without losing their escrow deposit. Common contingencies include:

• Inspection Contingency: Allows the wholesaler to cancel the contract if the property inspection reveals issues that make it unsellable.

• Financing Contingency: Allows the wholesaler to back out if they or their end buyer can't secure financing.

If the contract includes such contingencies, the wholesaler can use them to exit the agreement without penalty.

 
Forfeiting the Earnest Money Deposit

If there are no contingencies, or if the contingencies have expired, the wholesaler might have to forfeit their earnest money deposit. This deposit is typically a small percentage of the purchase price, and losing it can be seen as a cost of doing business. The deposit compensates the seller for taking the property off the market while the wholesaler tries to find an end buyer.

 
Renegotiating with the Seller

Sometimes, wholesalers can renegotiate the terms of the contract with the seller. This might involve:

Extending the Closing Date: Asking the seller for more time to find an end buyer.

Reducing the Purchase Price: Negotiating a lower price to make the deal more attractive to potential buyers.

Renegotiation can be a viable option if the seller is motivated and willing to be flexible.

 
Purchasing the Property

In some cases, the wholesaler might decide to purchase the property themselves. This requires having the necessary funds or obtaining financing. The wholesaler can then choose to:

Fix and Flip: Renovate the property and sell it at a higher price.

Hold and Rent: To generate passive income, keep the property as a rental.

While this option involves more risk and capital, it can also lead to significant profits if managed correctly.

 
Partnering with Other Investors

Wholesalers can also consider partnering with other investors who might have the resources or connections to find an end buyer. Forming partnerships or joint ventures can provide additional avenues for offloading the property and sharing the profits.

The Importance of Choosing a Title Company Experienced in Wholesale Real Estate

Wholesaling real estate involves unique processes and legalities that differ significantly from traditional real estate transactions. Choosing a title company with expertise in wholesaling is crucial for ensuring smooth, efficient, and legally compliant transactions. Here's why it's important for a wholesaler to select a title company familiar with the wholesale business:

Expertise in Wholesale Transactions

Wholesale deals often involve specialized contracts such as assignment contracts, double closings, and novations. An experienced title company can:

Ensure Accurate Contract Preparation: Draft and review contracts specific to wholesale transactions, ensuring they are legally sound and enforceable.

Manage Assignment Contracts: Handle the complexities of transferring purchase rights from the wholesaler to the end buyer smoothly and correctly.

Coordinate Double Closings: Efficiently manage the logistics of buying from the seller and selling to the end buyer, often on the same day.

 
Compliance with Legal and Regulatory Requirements

Wholesale transactions must adhere to specific legal and regulatory requirements that can vary by location. A knowledgeable title company will:

Ensure Legal Compliance: Keep the transaction in line with all applicable laws and regulations to avoid legal pitfalls.

Navigate Complex Regulations: Understand and manage the unique legal aspects of wholesaling, ensuring all parties are protected.

 
Efficient Resolution of Title Issues

Title problems can complicate any real estate transaction, but they are especially problematic in wholesale deals. An experienced title company can:

Conduct Comprehensive Title Searches: Identify and address any title defects or issues early in the process.

Provide Title Insurance: Offer policies that protect against future claims or disputes over property ownership.

Resolve Disputes Promptly: Handle any title disputes or issues that arise quickly and efficiently to keep the deal on track.

 
Mitigating Financial Risks

Wholesalers often operate on tight margins and timelines, so minimizing financial risk is crucial. A title company with wholesale expertise can:

Protect Earnest Money Deposits: Ensure contingencies are in place to protect the wholesaler's earnest money.

Facilitate Smooth Transactions: Manage the flow of funds efficiently, particularly in double closings where timing is critical.

 
Streamlined Communication and Coordination

Wholesale transactions typically involve multiple parties, including the wholesaler, the seller, the end buyer, and sometimes other investors. An experienced title company can:

Act as a Central Point of Contact: Coordinate communication between all parties to ensure everyone is on the same page.

Manage Documentation Flow: Handle the exchange of necessary documents promptly to prevent delays.

Keep the Transaction on Schedule: Ensure that all deadlines are met, preventing potential setbacks or cancellations.

 
Expertise in Novation Agreements

Novation agreements, where the original purchase contract is replaced with a new one involving the end buyer, require specific legal knowledge. A skilled title company can:

Guide Through Novation Process: Assist in executing the novation process legally and efficiently.

Draft and Review Documents: Prepare and review the necessary legal documents to effect the novation.

Ensure Seamless Transition: Facilitate a smooth transition from the original contract to the new agreement.

 

Conclusion

Choosing a title company with expertise in wholesale real estate is essential for wholesalers who want to minimize risks and ensure smooth, successful transactions. Such a company brings the necessary knowledge, efficiency, and attention to detail to handle the unique challenges of wholesaling, including managing assignment contracts, double closings, and novations. Wholesalers must be prepared for risks like not finding an end buyer by including protective contingencies, renegotiating with sellers, or partnering with other investors. Wholesaling can be a rewarding investment strategy with careful planning and adaptability. At Giannell Title, we specialize in supporting wholesalers with our deep understanding of the wholesale real estate market. If you have any questions or need assistance with title insurance, please contact Jason at Giannell Title. We're here to help you navigate the complexities of real estate investing and ensure your transactions go smoothly.

About the Author

Jason Cummings

[email protected] | Director of Business Development

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